Brazil: SESG and the capital markets

Sustainability and Environmental, Social and Governance Alert

Observers in Brazil are paying close attention to the approaches the country is taking to address SESG – Sustainability and Environmental, Social and Governance – issues, the broad term for factors used to evaluate a business’ collective conscientiousness about social and environmental factors. SESG factors embrace climate impacts as well as concerns around diversity, inclusion, communities (and other social issues) and governance.

Brazil faces enormous challenges in seeking to address SESG and move toward a more carbon-neutral future.  For instance, in the environmental area, one great challenge concerns the reduction of carbon emissions.  Brazil is one of top ten carbon emitters on the planet.  

SESG’s social factor

Social issues are no less challenging. SESG’s “social” factor is relevant to diversity and inclusion policies in companies, but it can also relate to monitoring the supply chain and social actions with companies’ local communities – in particular, economic inequality.  According to a 2020 report by Oxfam, Brazil was the seventh most unequal country in the world – a situation that worsened during the pandemic.  According to the Brazilian Institute of Geography and Statistics (IBGE), last year, 10.3 million Brazilians were experiencing serious food insecurity.

Brazil is seeking to use the capital markets, which can play an important role in enhancing companies’ SESG actions, as one pathway to address these concerns.

SESG funds and the PRI criteria

For example, in Europe and the US, there are funds which either prioritize or exclusively invest in companies that adopt sound SESG practices. In Brazil, SESG funds are also starting to be offered in the market, mainly including the PRI (Principles for Responsible Investment) criteria in their analyses of investment. In other words, to be able to access this capital, companies must adopt actions that address environmental, social and governance issues. This will serve as an incentive for the adoption and multiplication of these practices in the market.

Recently, the Brazilian Securities and Exchange Commission (CVM) placed in public hearing a regulation that, according to the regulator, has the “objective of reducing the cost of compliance and improving the informational regime of issuers of securities, with the inclusion of information that reflects social, environmental and of corporate governance aspects.”

The regulation aims to improve the Reference Form (similar to the US Form 20-F) that deals with the subject. Particularly important will be the adoption of the “practice-or-explain” rule, so that issuers that do not disclose sustainability reports or equivalent documents, or that do not have key performance indicators for environmental and social issues, must provide explanations to the market on the reasons for not doing so.

Furthermore, with this regulation, CVM introduces new information requirements related to environmental, social and corporate governance issues, in particular with regard to (a) aggregated data on the diversity of management bodies and the indication of channels, if any, through which critical matters on environmental and social issues are brought to the attention of the board of directors; (b) clarifications on whether management remuneration is affected by

 environmental and social indicators; and (c) information on workplace diversity and differences in pay levels.

New Brazilian index

In another move, in September 2020 the Brazilian stock exchange B3, together with S&P Dow Jones Indices, announced the new B3/S&P Brazil ESG Index. The broad-based index,  designed to highlight strongly performing SESG companies, uses rules-based selection criteria based on relevant SESG principles to select and weight its constituents from the S&P Brazil BMI (Broad Market Index) that are locally listed on the B3. The index’s objective is to give investors core exposure to the Brazilian equities market while boosting SESG score performance.  At this writing, 96 companies are listed on the index.

Investment funds in credit rights

Another innovative product in this area is the use of investment funds in credit rights through Brazil’s Fundo de Investimento em Direitos Creditórios (FIDC) in structuring financings for socio-environmental ventures, in particular for small farmers who practice regenerative agriculture. Credits granted for these operations are assigned to the FIDC, which can issue junior and mezzanine shares to investors who have an appetite for venture philanthropy (investing in assets with low return on investment). These operations may also involve the purchases of carbon credits generated by the project, to increase the return on investment.

Green bonds

A final factor to note is that Brazilian banks and companies are issuing debt securities in the international capital market linked to the financing of projects in the environmental area:  so-called green bonds. These bonds have seen growing demand from investors who are seeking conscientious investment in environmental projects that meet certain certification assessment criteria. In the international market, certifications can be made by the Climate Bond Initiative, which has been leading this process mainly in Europe and the US. In Brazil, the certification can be made according to the rules of the Guide for the Issuance of Green Bonds in Brazil, edited by the Brazilian Bank Federation (Febraban) and the Brazilian Business Council for Sustainable Development (CEBDS).

Going forward

In 1970, Milton Friedman published an article in the New York Times that became famous: “The Social Responsibility of Business Is to Increase Its Profits.” That concept has dominated the business world for decades.  But in recent times, another view has emerged. A new “stakeholder capitalism” model is developing and is being discussed in boardrooms and virtual meetings around the world.  SESG is a cornerstone of this new model. Brazilian businesses and regulators are coming to understand that the world’s growing emphasis on SESG presents new opportunities.  These recent developments in the Brazilian capital markets are part of the new picture

Observers in Brazil are paying close attention to the approaches the country is taking to address SESG – Sustainability and Environmental, Social and Governance – issues, the broad term for factors used to evaluate a business’ collective conscientiousness about social and environmental factors. SESG factors embrace climate impacts as well as concerns around diversity, inclusion, communities (and other social issues) and governance.

Brazil faces enormous challenges in seeking to address SESG and move toward a more carbon-neutral future.  For instance, in the environmental area, one great challenge concerns the reduction of carbon emissions.  Brazil is one of top ten carbon emitters on the planet.  

SESG’s social factor

Social issues are no less challenging. SESG’s “social” factor is relevant to diversity and inclusion policies in companies, but it can also relate to monitoring the supply chain and social actions with companies’ local communities – in particular, economic inequality.  According to a 2020 report by Oxfam, Brazil was the seventh most unequal country in the world – a situation that worsened during the pandemic.  According to the Brazilian Institute of Geography and Statistics (IBGE), last year, 10.3 million Brazilians were experiencing serious food insecurity.

Brazil is seeking to use the capital markets, which can play an important role in enhancing companies’ SESG actions, as one pathway to address these concerns.

SESG funds and the PRI criteria

For example, in Europe and the US, there are funds which either prioritize or exclusively invest in companies that adopt sound SESG practices. In Brazil, SESG funds are also starting to be offered in the market, mainly including the PRI (Principles for Responsible Investment) criteria in their analyses of investment. In other words, to be able to access this capital, companies must adopt actions that address environmental, social and governance issues. This will serve as an incentive for the adoption and multiplication of these practices in the market.

Recently, the Brazilian Securities and Exchange Commission (CVM) placed in public hearing a regulation that, according to the regulator, has the “objective of reducing the cost of compliance and improving the informational regime of issuers of securities, with the inclusion of information that reflects social, environmental and of corporate governance aspects.”

The regulation aims to improve the Reference Form (similar to the US Form 20-F) that deals with the subject. Particularly important will be the adoption of the “practice-or-explain” rule, so that issuers that do not disclose sustainability reports or equivalent documents, or that do not have key performance indicators for environmental and social issues, must provide explanations to the market on the reasons for not doing so.

Furthermore, with this regulation, CVM introduces new information requirements related to environmental, social and corporate governance issues, in particular with regard to (a) aggregated data on the diversity of management bodies and the indication of channels, if any, through which critical matters on environmental and social issues are brought to the attention of the board of directors; (b) clarifications on whether management remuneration is affected by

 environmental and social indicators; and (c) information on workplace diversity and differences in pay levels.

New Brazilian index

In another move, in September 2020 the Brazilian stock exchange B3, together with S&P Dow Jones Indices, announced the new B3/S&P Brazil ESG Index. The broad-based index,  designed to highlight strongly performing SESG companies, uses rules-based selection criteria based on relevant SESG principles to select and weight its constituents from the S&P Brazil BMI (Broad Market Index) that are locally listed on the B3. The index’s objective is to give investors core exposure to the Brazilian equities market while boosting SESG score performance.  At this writing, 96 companies are listed on the index.

Investment funds in credit rights

Another innovative product in this area is the use of investment funds in credit rights through Brazil’s Fundo de Investimento em Direitos Creditórios (FIDC) in structuring financings for socio-environmental ventures, in particular for small farmers who practice regenerative agriculture. Credits granted for these operations are assigned to the FIDC, which can issue junior and mezzanine shares to investors who have an appetite for venture philanthropy (investing in assets with low return on investment). These operations may also involve the purchases of carbon credits generated by the project, to increase the return on investment.

Green bonds

A final factor to note is that Brazilian banks and companies are issuing debt securities in the international capital market linked to the financing of projects in the environmental area:  so-called green bonds. These bonds have seen growing demand from investors who are seeking conscientious investment in environmental projects that meet certain certification assessment criteria. In the international market, certifications can be made by the Climate Bond Initiative, which has been leading this process mainly in Europe and the US. In Brazil, the certification can be made according to the rules of the Guide for the Issuance of Green Bonds in Brazil, edited by the Brazilian Bank Federation (Febraban) and the Brazilian Business Council for Sustainable Development (CEBDS).

Going forward

In 1970, Milton Friedman published an article in the New York Times that became famous: “The Social Responsibility of Business Is to Increase Its Profits.” That concept has dominated the business world for decades.  But in recent times, another view has emerged. A new “stakeholder capitalism” model is developing and is being discussed in boardrooms and virtual meetings around the world.  SESG is a cornerstone of this new model. Brazilian businesses and regulators are coming to understand that the world’s growing emphasis on SESG presents new opportunities.  These recent developments in the Brazilian capital markets are part of the new picture

Observers in Brazil are paying close attention to the approaches the country is taking to address SESG – Sustainability and Environmental, Social and Governance – issues, the broad term for factors used to evaluate a business’ collective conscientiousness about social and environmental factors. SESG factors embrace climate impacts as well as concerns around diversity, inclusion, communities (and other social issues) and governance.

Brazil faces enormous challenges in seeking to address SESG and move toward a more carbon-neutral future.  For instance, in the environmental area, one great challenge concerns the reduction of carbon emissions.  Brazil is one of top ten carbon emitters on the planet.  

SESG’s social factor

Social issues are no less challenging. SESG’s “social” factor is relevant to diversity and inclusion policies in companies, but it can also relate to monitoring the supply chain and social actions with companies’ local communities – in particular, economic inequality.  According to a 2020 report by Oxfam, Brazil was the seventh most unequal country in the world – a situation that worsened during the pandemic.  According to the Brazilian Institute of Geography and Statistics (IBGE), last year, 10.3 million Brazilians were experiencing serious food insecurity.

Brazil is seeking to use the capital markets, which can play an important role in enhancing companies’ SESG actions, as one pathway to address these concerns.

SESG funds and the PRI criteria

For example, in Europe and the US, there are funds which either prioritize or exclusively invest in companies that adopt sound SESG practices. In Brazil, SESG funds are also starting to be offered in the market, mainly including the PRI (Principles for Responsible Investment) criteria in their analyses of investment. In other words, to be able to access this capital, companies must adopt actions that address environmental, social and governance issues. This will serve as an incentive for the adoption and multiplication of these practices in the market.

Recently, the Brazilian Securities and Exchange Commission (CVM) placed in public hearing a regulation that, according to the regulator, has the “objective of reducing the cost of compliance and improving the informational regime of issuers of securities, with the inclusion of information that reflects social, environmental and of corporate governance aspects.”

The regulation aims to improve the Reference Form (similar to the US Form 20-F) that deals with the subject. Particularly important will be the adoption of the “practice-or-explain” rule, so that issuers that do not disclose sustainability reports or equivalent documents, or that do not have key performance indicators for environmental and social issues, must provide explanations to the market on the reasons for not doing so.

Furthermore, with this regulation, CVM introduces new information requirements related to environmental, social and corporate governance issues, in particular with regard to (a) aggregated data on the diversity of management bodies and the indication of channels, if any, through which critical matters on environmental and social issues are brought to the attention of the board of directors; (b) clarifications on whether management remuneration is affected by

 environmental and social indicators; and (c) information on workplace diversity and differences in pay levels.

New Brazilian index

In another move, in September 2020 the Brazilian stock exchange B3, together with S&P Dow Jones Indices, announced the new B3/S&P Brazil ESG Index. The broad-based index,  designed to highlight strongly performing SESG companies, uses rules-based selection criteria based on relevant SESG principles to select and weight its constituents from the S&P Brazil BMI (Broad Market Index) that are locally listed on the B3. The index’s objective is to give investors core exposure to the Brazilian equities market while boosting SESG score performance.  At this writing, 96 companies are listed on the index.

Investment funds in credit rights

Another innovative product in this area is the use of investment funds in credit rights through Brazil’s Fundo de Investimento em Direitos Creditórios (FIDC) in structuring financings for socio-environmental ventures, in particular for small farmers who practice regenerative agriculture. Credits granted for these operations are assigned to the FIDC, which can issue junior and mezzanine shares to investors who have an appetite for venture philanthropy (investing in assets with low return on investment). These operations may also involve the purchases of carbon credits generated by the project, to increase the return on investment.

Green bonds

A final factor to note is that Brazilian banks and companies are issuing debt securities in the international capital market linked to the financing of projects in the environmental area:  so-called green bonds. These bonds have seen growing demand from investors who are seeking conscientious investment in environmental projects that meet certain certification assessment criteria. In the international market, certifications can be made by the Climate Bond Initiative, which has been leading this process mainly in Europe and the US. In Brazil, the certification can be made according to the rules of the Guide for the Issuance of Green Bonds in Brazil, edited by the Brazilian Bank Federation (Febraban) and the Brazilian Business Council for Sustainable Development (CEBDS).

Going forward

In 1970, Milton Friedman published an article in the New York Times that became famous: “The Social Responsibility of Business Is to Increase Its Profits.” That concept has dominated the business world for decades.  But in recent times, another view has emerged. A new “stakeholder capitalism” model is developing and is being discussed in boardrooms and virtual meetings around the world.  SESG is a cornerstone of this new model. Brazilian businesses and regulators are coming to understand that the world’s growing emphasis on SESG presents new opportunities.  These recent developments in the Brazilian capital markets are part of the new picture